Browsing articles in "Weekly Market Update"

Not Your Father’s Central Bank

Mar 2, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The Dow Jones Industrial Average (DJIA) closed above 13,000 this week, marking the first time since June 2008 that it managed to hold onto this level.  However, it didn’t last long and the next day investors sent the market lower where it stayed for the remainder of the week.

In both the preceding years (2010 & 2011), we watched the market get ahead of itself in the first months of the New Year before pulling back five to ten percent.  Investors, fearing they would miss the train, moved cash that had been on the sidelines into the market.  However, as it turns out, in both years there were unfortunate events which caused the markets to correct.  In 2010, the tragic BP oil spill in the Gulf of Mexico caused some to question the sustainability of the weak economic recovery.  In 2011, the Japanese nuclear meltdown, the wars in Egypt and Libya and the flooding in Thailand each helped make the markets more volatile and sent it lower through most of the summer.  At this point into 2012, we’ve had a healthy run.  While we can see how markets could move higher, any number of events could trigger a “normal” pullback in the neighborhood of five to ten percent in the months ahead.  We remain invested prudently and vigilantly watch the horizon for the unforeseen.

As for the news this week, it really boils down to two largely uneventful stories.  On Wednesday, the European Central Bank (ECB) launched phase two of their lending program (LTRO) to the tune of roughly $650 billion.  This allowed European banks to go to the ECB and borrow money essentially for free, while using questionable collateral, i.e. Greek debt.  This was a move to shore up banks balance sheets and provide some liquidity.  The other news this week was the semi-annual Humphrey-Hawkins testimony of the Federal Reserve Chairman before both the House and Senate.  Although there was no new information, to many, it seems apparent that there is little likelihood for further quantitative easing in the near future.  With a lack of QE3 in the offing, the markets sold off.

The economic news remains mixed.  January durable goods orders came in substantially lower than expected and home prices in December fell further.  Despite talk of a housing recovery, home prices in Atlanta, Cleveland, Detroit and Las Vegas are all below their 2000 levels.  Yet February consumer confidence came in higher than expected and the second estimate for Q4 Gross Domestic Product (GDP) was revised higher from 2.8% to 3.0%.  And in an ironic twist, U.S. 2011 exports of gasoline, diesel and other fuels exceeded imports for the first time since 1949, the Energy Department reported.  It’s yet to be seen whether this repeats in 2012.

While this isn’t the story of the week, I had to file this under unintended consequences.  The Federal Reserve has made it their policy to keep interest rates unusually low.  In layman’s terms, this means zero percent.  Yet many, including Bill Gross from Pimco, feel that this perversion of the yield curve could have unintended consequences.  We learned this week that the central bank of Israel has begun a pilot program, investing a portion of its dollar denominated reserves in U.S. equities.  Ultimately, their goal is to move ten percent of their reserves or approximately $8 billion into the U.S. equity market.  This could be great news for the markets if other central banks follow suit.

And lastly, the story of the week is about Internet speed.  As the pioneer of the Internet, it might be surprising to discover that the United States does not have the fastest Internet infrastructure.  In fact, we don’t even fall in the top five countries in the world.  A recent report by compared and ranked consumer download speeds around the globe.  They discovered that South Korea, Lithuania, Latvia, Sweden and Romania round out the top five countries for download speed.  If you’re wondering where the United States falls on this list you’d have to go all the way down to number thirty.  The top five countries speed, on average, is more than double that of the United States.  Ponder that while you wait for your Internet Explorer page to refresh.  Now you know.

March 2, 2012

Tooth Fairy As Economic Indicator?

Feb 24, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Despite a short holiday week and low volumes, the market held on to recent gains.  In fact, the Dow Jones Industrial Average broke through 13,000 for the first time since May 2008 and looks to close right around that level if it can hold on today.

Tensions in the Middle East have once again taken center stage as all eyes look toward Syria and Iran for what is shaping up to be the next geopolitical problem.  As a result, the price of oil has once again started to climb and could pose a stumbling block to the world’s economies.  News of political unrest and potential oil supply disruptions are having an impact.  For example, the price of oil shot above $108/barrel causing the average price of regular gasoline in the U.S. to rise to $3.57/gallon – the highest ever for this time of year.  With Europe in the beginning stages of a mild recession and the U.S. economy showing signs of slowing, it comes at a bad time for the price of oil to jump so far so fast.  Some economists believe gas will go to $4.00/gallon by Labor Day while others suggest that $5.00/gallon is a distinct possibility this summer.  As a guidepost, gasoline hit $4.02/gallon last May and a record of $4.16/gallon in July 2008.  These are disappointing developments which we’ll be monitoring closely in the weeks and months ahead.

In other news, it seems that Greece’s monetary woes have been treated to a new band-aid.  The Greek Parliament voted to enact austerity measures that had been reached by negotiators last week, thereby paving the way for another cash infusion of $175 billion out of Europe.  In addition, the $277 billion held by private investors will face a 53% loss whether investors want to participate in the debt restructuring or not.  Greece passed a provision, retroactively, that ensures investors have no choice in the matter.  Exempted from the debt restructuring are national central banks.  The goal is to reduce Greece’s debt to 121% of GDP by 2020, from roughly 160% now.  Many believe this latest move simply delays the inevitability of a Greek default.  Only time will tell.  What we do know is that Greece holds presidential elections in two months and the outcome of these elections could result in the backing out of the agreements that were signed this week.

Here at home, President Obama proposed sweeping corporate tax reforms.  Among the proposals is the reduction of the top corporate tax rate from 35 percent to 28 percent.  The plan would eliminate dozens of tax breaks and reshape the current manufacturing deduction to reduce the tax rate on manufacturing to 25 percent.  The current U.S. corporate tax rate is the second-highest marginal rate in the world, behind Japan.  However, effective tax rates on U.S. companies are well below 30 percent, and in line with the tax burden in other major economies.  This is a very contentious issue amongst both Democrats and Republicans.  Although dead on arrival, these proposals will likely be fodder for the upcoming election cycle.

In closing, I came across an interesting bit of trivia that I thought worth sharing.  Even the tooth fairy is feeling a bit more flush these days, a sign that perhaps the worst of the recession is over.  A new poll shows the average tooth fairy dividend is up 13% from last year, from $1.88 to $2.13 per tooth nationwide with some 84% of parents surveyed saying that the tooth fairy visits their home.  Delta Dental polls 1,500 people each year to come up with their Tooth Fairy Index℠.  “Over time, the Tooth Fairy Index shows that the value of a lost tooth is closely related to the U.S. economy.  In fact, in seven of the past 10 years, the trend in average giving has tracked with movement of the Dow Jones Industrial Average (DJIA).”  Now you know.

February 24, 2012

Italy Gives Counterfeiters the Boot

Feb 17, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

We thought that this could be a tumultuous week after riots in Greece this past weekend and a heightening of rhetoric with Iran.  But as it turns out, this week was anything but tumultuous.  In fact, the Dow is once again flirting with the 13,000 mark.  At the end of the day, it appears that left to its own devices, the market wants to go higher.

No week would be complete without a brief recap of what’s going on in Greece.  It’s complicated.  The citizens of Greece aren’t happy.  Then again with an unemployment rate of 20% (growing to 50% for those under the age of 25) and the government sector slashing government jobs and pensions, I’m not sure why we should expect them to act any different.  Then there are the investors who, for obvious reasons, don’t want to take a hit on their investment in Greek bonds.  And let’s not forget about Europe who is being asked to bail out Greece despite the indications that Greece is a lost cause.  So when we observe that the media is suggesting that a resolution is right around the corner, we have to laugh a little.  Not in a mean spirited way but in an exasperated, are you kidding me kind of way?  We should add that Greek elections are scheduled for April and it’s almost certain the incumbents will lose.  This game is far from over.

For better news, we turn to the payroll tax cut extension that was passed by both houses of Congress today.  In an about face, Republicans dropped their opposition to tax breaks (that would presumably increase the national debt) without requiring offsetting expense cuts elsewhere.  In the spirit of bipartisanship, both parties came together to pander to us, the voters.  Under the bill, workers would continue to receive a 2 percentage point increase in their paychecks, and people out of work for more than six months would keep jobless benefits averaging about $300 a week. It will also head off a steep cut in reimbursements for physicians who treat Medicare patients.  These measures extend the payroll tax cuts through the end of 2012.

Company news was pretty sparse this week.  Perhaps the piece that got the most attention was when Apple passed $500 per share for the first time in its history.  The company is now worth $466 billion versus Exxon’s $398 billion.  In other news, the deal between Procter & Gamble and Diamond Foods was officially called off.   Diamond Foods had made an offer to purchase the Pringles brand from P&G before succumbing to an investigation for “accounting irregularities”.  Not missing a beat, P&G turned around and within days sold the division to Kellogg for $2.7 billion.  And lastly, in an ironic twist, Pepsico says it knows how to sell more orange juice: Add water.  They are focusing on products with less juice under the assumption that consumers will pay more for a product with fewer calories.

For the story of the week we turn to Italy.  It was announced today that Italian police seized $6 trillion of fake U.S. Treasury bonds.  Apparently this began as an investigation into mafia loan-sharking.  The bad news is that these bonds were on their way to the European Central Bank (ECB) to be used as collateral in the February 29 Long Term Refinancing Option (LTRO).  One astute reader commented that, “the failure of the counterfeiters was disguising the bonds properly.  REAL American T-Bills have ‘Made in China’ printed on the back.  These were ‘Made in America’, easily detectable as frauds.”  Now you know.

February 17, 2012: Market Update

Congress Corrects Their Trading Ways

Feb 10, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The market tried to make new highs this week but, lacking escape velocity, was unsuccessful due to news out of Greece. As mentioned a couple of weeks ago, the market appears to be losing steam after what was widely viewed as a great start to the year. Unfortunately, improving economic indicators and reasonably good earnings reports only go so far. At the end of the day, the issues facing Europe remain serious and unresolved.

If this was a baseball game, we’d be in the bottom of the 7th inning. There’s still plenty of time for a resolution but everyone knows that time is running out. At issue are the debt reduction talks and the austerity expense cuts that we’ve talked about ad nauseum over the past several months. Without belaboring the point, the negotiators reached an amicable agreement (like a prize fighter threatening a scrawny kid) and Greece must now vote on the resolution. No less than four government officials have resigned this week over what they view as a distasteful agreement which hands Greece’s sovereignty over to European technocrats. With strikes promised and civil unrest right around the corner, we anticipate this story to continue for some time yet.

The largest non-consequential story this week has to do with the $25 billion settlement between the five largest loan originators and the states. This agreement has been very controversial to many people on many levels. In essence, it assists people who bought more house than they could afford, put little to no money down, stopped making payments and/or walked away from their homes. So who won’t have any chance of a principal reduction? That would be most borrowers, including anyone current on a mortgage and people with loans owned or guaranteed by a government entity, including Freddie Mac, Fannie Mae or the Federal Housing Administration (FHA). Combined, these agencies hold about 56% of existing home loans. The Federal Reserve estimates that 12 million mortgages are underwater, but that 8.6 million of those underwater are current on their payments. And if you were worried about the moral hazard that this creates, that went out the window in 2008.

The third story that caught my attention this week is two bills that made their way through both the House and the Senate over the past couple of weeks. It turns out that Congress, embarrassed by claims of insider trading, has finally taken up measures to stop this behavior. We reported on the original story and subsequent outrage several months back when this story broke. However, the news that caught our attention this week has to do with a first of its kind case involving a member of Congress for violating insider trading laws. In recent years, Rep. Spencer Bachus (R-Ala) has made numerous trades, some of them coinciding with major policy announcements by the federal government and industries under his congressional oversight, according to a review of his financial disclosure forms by The Washington Post. The Office of Congressional Ethics (OCE) has notified Bachus that he is under investigation and that they have found probable cause to believe insider-trading violations have occurred. Note that these alleged violations took place while he served as the chairman of the House Financial Services Committee. We’re encouraged that action is being taken on this seemingly common practice.

For the most interesting story of the week, we turn to the case before a California federal court which is set to determine whether amusement park animals are protected by the same constitutional rights as humans. It turns out that People for the Ethical Treatment of Animals (PETA) has filed suit in San Diego on behalf of five orcas that perform water acrobatics at the SeaWorld amusement park. PETA argues that the whales’ “employment” at SeaWorld violates the 13th Amendment, which prohibits slavery. According to PETA, “It’s a new frontier of civil rights.” The case is unprecedented and should prove good fodder for the evening news. Now you know.

February 10, 2011: Market Update


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